CFTC eyes warehousing after LME application

NEW YORK  The London Metal Exchange has applied to be a foreign board of trade in the United States, a move that has led to increased scrutiny by the US regulator of its warehousing system.

Vincent McGonagle, director in the market oversight division of the US Commodity Futures Trading Commission (CFTC), said that the LMEs application had led the regulator to evaluate whether the long queues to access metal in LME-approved warehouses were the cause of high premiums for physical delivery.

"The issue requires some degree of evaluation by the CFTC as it relates to the LME application for registration as a foreign board of trade," McGonagle told a subcommittee of the US senate committee on banking, housing and urban affairs Jan. 15.

He said the CFTC was "engaged with the LME" on the warehousing issue and was also discussing the rule changes following the metals exchanges consultation with members last year.

"[Warehousing and the queues] are an area to be explored by the CFTC through the LMEs application," McGonagle said, noting that the regulator would always evaluate the markets to find any activity it deemed to be intended to manipulate prices.

According to the CFTC website, the LMEs application dates back to August 2012 and is pending. A further 21 applications from other international exchanges are pending, with the Alberta, Canada-based Natural Gas Exchange the only application for which a registration order has been issued.

Premiums for physical delivery of aluminum have shot up in the past few weeks, with market participants quoting bids and offers either side of 19 cents per pound. The LME rules were changed after complaints that long queues to access metal were pushing premiums higher (amm.com, Jan 2).

Since the rule changed was announced, the queues have grown longer and the premiums have rocketed.